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Fooling China's dam builders

Malaysia’s government has hidden environmental and economic costs of dams to attract Chinese money, warns Kirk Herbertson. But the investors too must take responsibility – or face the consequences.

When Chinese state-owned companies invest overseas, they can be caught off-guard by corruption and environmental risks that arise because they assume the host government will resolve these problems. But after recent events such as the suspension of the Myitsone Dam in Myanmar, Chinese companies have conceded that this may be a flawed approach.

In Sarawak—a forested Malaysian state on the island of Borneo— three Chinese state-owned companies are helping to build a network of as many as 51 controversial dams to spur rapid industrial development. (Twelve schemes are firmly on the drawing board for 2020, while there is discussion of building many more by 2037). China Three Gorges Corporation, Sinohydro and the China State Grid Corporation are relying almost entirely on the Sarawak state government to manage the extensive environmental risks of these projects, and the companies have failed to respond to numerous allegations of corruption against their business partners. For Chinese investors, this is a ticking time bomb of local opposition and a public relations disaster waiting to happen.

At first glance, Sarawak provides the kind of “win-win development” that the Chinese government likes to promote. The Sarawak government wants to build the first 12 dams by 2020 in order to produce 7,000 megawatts of electricity and argues that the dams will attract industry to Sarawak and lead to rapid economic growth.

The Sarawak government is led by Chief Minister Abdul Taib Mahmud, who has been in power for the past 30 years. Taib is the state’s leading proponent of dam projects, and he has coordinated an effort to bring Chinese investors to Sarawak. For example, in 2007 a representative of Sarawak’s state-owned electricity company spoke during a China-ASEAN forum about potential Chinese involvement in the dams. In June 2009, the Malaysian prime minister discussed the dams with President Hu Jintao during his state visit to China. In April 2010, Taib led a Sarawak delegation to China to visit the Three Gorges Dam and meet with hydropower developers.

Over time, Taib’s efforts have paid off. In 2008, Sarawak’s electricity company and China Three Gorges Corporation signed a US$1 billion agreement to build the 944-megawatt Murum Dam. Construction began shortly after. In 2010, the Malaysian government and the China State Grid Corporation signed an US$11 billion deal to cooperate in developing dams and related projects. In 2011, with the help of Sinohydro and China Export Import Bank, the controversial 2,400-megawatt Bakun Dam became operational after a delay of almost five decades.

But Taib has not provided the Chinese government with a complete picture of costs and benefits of the dams. The hidden environmental costs of these schemes will be significant, while mounting anger from local communities over the projects could lead to major delays. Tens of thousands of indigenous people will be displaced. Many of the indigenous people who have already lost their traditional lands and hunting grounds from the Bakun and Murum dams have found alternative livelihoods and continue to demand better compensation. The full scale of the impacts is unknown, however, because the Taib government has not shared an environmental impact assessment with the public. Public trust is low; no one believes government promises that the environmental impacts will be minimal.

While Malaysia’s environmental laws look strong on paper, corruption prevents these laws from functioning in Sarawak. As widely reported in the Malaysian media, Taib and his family have a controlling ownership stake in many of the local companies that have received contracts to work on the dams. But he also chairs the board that reviews the environmental impact of dams. This is a clear conflict of interest. Indigenous communities have tried to enforce their traditional land rights in Malaysian courts. According to Mark Bujang, head of the Borneo Resources Institute of Malaysia, there are 327 ongoing court cases related to native customary land issues. As Bujang explained, “the courts are beginning to accept the concept of customary land according to the customs and practices of the natives.”

Corruption has also affected potential investors in Sarawak. In March, the mining giant Rio Tinto cancelled its plans to build a US$2 billion aluminum smelter that would have used electricity from the Bakun Dam, not long after the Malaysian national government began a corruption investigation into the project.

The Taib government has also failed to tell Chinese investors about the economic risks of these projects. The 2,400-megawatts of electricity produced by the Bakun Dam already far exceeds Sarawak’s current demand of 972-megawatts of electricity, and the state government has still not found enough willing buyers for the excess electricity. Plans to export the electricity to Malaysia’s mainland have already been scrapped for being too costly and technically unfeasible; and so most of the electricity produced will have to be consumed within Sarawak or other parts of Borneo Island.

But despite having no immediate use for the electricity, the Taib government has continued to seek Chinese investment to build yet more dams.

The Chinese government has made significant progress in improving the way that state-owned companies manage the environmental impacts of their overseas investment. Yet the dams of Sarawak offer an important lesson. It is not enough for multinational companies to rely exclusively on the host government to prevent environmental harm and corruption. Companies should conduct their own environmental due diligence, consult directly with local communities, and never proceed with a project until a robust environmental impact assessment has been completed. This is already common practice among many of the world’s leading multinational companies and will hopefully soon be embraced by Chinese investors as well.

In cases where multiple dams are planned for the same area, it is best practice to conduct a strategic environmental assessment of the cumulative impacts of the dams. The absence of such studies prevents an informed discussion of the risks of the projects, to the detriment of both local communities and businesses.

With such a risky venture, the Chinese government and companies involved should be asking tougher questions of their business partners in the Taib government. Where are the studies on the potential impacts of the projects? What has the Taib government done to weigh the costs and benefits of this scheme against other, more feasible alternatives?

China could actually benefit more if it could look beyond large hydropower as the main vehicle for its investments, and instead view Sarawak as a new market for its innovative clean-energy technologies.

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